Starting Small and Renegotiation
UCSD Economics Discussion Paper 97-17
40 Pages Posted: 3 Apr 1998
Date Written: July 1997
Abstract
This paper develops a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. An equilibrium in which the partners "start small" is studied and shown to be uniquely selected by a strong renegotiation condition. The characterization offers new insights on how relationships change as parties learn about each other and on qualitative differences between situations of one- and two-sided incomplete information. In particular, stakes rise and types separate faster in the two-sided case. The equilibrium is shown to have other intuitive properties as well.
JEL Classification: C73, C78, D82
Suggested Citation: Suggested Citation